Easing Iran sanctions sparks hopes for petchems exports, but hurdles remain
By Brendan Daly, Shashank Shekhar, Andrew Allan
March 05, 2014 - Clutching framed portraits of Iran's president, Hassan Rouhani, the Tehran crowd in late November cheered the arrival home of Iran's nuclear negotiators.
Three days earlier in Geneva, Switzerland, they had signed an historic deal that bound Iran to set temporary curbs on enriching uranium in return for an easing of US-led economic sanctions that had hammered the country's currency, choked off oil exports and battered its petrodollar economy.
By unlocking foreign reserves and loosening restrictions on exports of petrochemicals, cars and precious metals for six months, US officials said the deal was worth $7 billion to Iran's fragile economy, which had witnessed rampant inflation and falling real GDP over the past two years.
The half-year reprieve was meant to give time for both sides to thrash out a permanent agreement over Iran's entitlement to nuclear technology.
Analysis continues below...
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Yet early indications show Iran's petrochemicals sector, once a major exporter of methanol and polyethylene (see chart), may struggle to take advantage of the reprieve, while political commentators are skeptical a long-term solution to a decade-old impasse can be reached any time soon.
For commodity traders, insurers, shippers, and particularly those in the petrochemical sector, the prize is big.
Of the $7 billion estimate, the US administration says that Iran could yield $1.5 billion in revenue from selling metals, cars and petrochemicals during the window.
Excited about access
Given the scale of Iranian chemicals production, many are excited about the possibility of easier access to the country's plastics and chemicals output.
With capacity of over 7 million mt of ethylene (see table)
, it has a little under 5% of global installed nameplate capacity and is the second largest producer and exporter of petrochemicals in the Middle East, after Saudi Arabia.
In recent years it has been a major player on the global stage in polyethylene and methanol, exporting almost a 1 million mt and 1.5 million mt respectively.
Fueled by cheap ethane, its 11 steam crackers give Iran the potential to be a key global force with the capacity to export either east or west.
In a normal political environment, Iran would play a major part in setting prices for plastic products such as polyester and bottles and solvents such as paints and cleaning products.
But sanctions have bitten hard, particularly by choking off access to technology, catalysts, cheap shipping and insurance.
In 2010, the EU imported petrochemical products from Iran worth over $1 billion. Now it's dropped to about $50 million.
While Iranian officials have in the past been keen to play down the impact of sanctions, one official with Iran's state-owned National Petrochemical Company told Platts in February that now the country can import catalysts it would start to ramp up production.
"We will need another month before products from Iran are offered in good volumes into the international markets."
Increase in global supply
So how much will be coming?
Adrian del Maestro, an analyst and director at consultants Booz & Company, said if ethylene utilization rates were raised to 90%, it could mean about 1.2 million additional mt on the market. That's equivalent to around 1% of global annual demand.
And it is not just volumes that could increase for Iranian sellers. Somewhat counter-intuitively perhaps, prices of Iranian product could rise as it is more easily traded.
To maintain product flows and to prop up its petrodollar economy, Iran has had to offer petrochemical products at below market value to encourage buyers outside of sanction-hit countries. That could change with the thawing of relations.
"Any impact will be [revenue] positive, because anything that made its way out was done through aggressive pricing and undercutting, so the market should become far more rational," says Hassan Ahmed, co-founder of Alembic Global Advisors.
Most observers, including distributors of Iranian product, expect that product to head to Asia with Iran keeping an eye on possible arbitrage opportunities to Europe.
According to a February report by Iran Customs Administration, most Iranian petrochemical exports last year headed to China, Iraq, the UAE, India and Afghanistan, with Chinese customs data revealing that its imports of all grades of polyethylene from Iran doubled (see chart) over the same period.
In addition, Turkey imports large quantities of polymers from Iran (see chart), and Iranian suppliers expect demand for its products to increase globally.
"We have had approaches from end-users and European traders -- they are ready to do business," said a source at Petrochemical Commercial Company, Iran's largest supplier of petrochemical products to the international markets.
Finding financing, technical expertise could prove challenging